ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion includes forward-looking statements about our business, financial condition and results of operations, including discussions about management’s expectations for our business. The financial condition, results of operations and cash flows discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are those of Better Choice Company Inc. and its consolidated subsidiaries, collectively, the “Company,” “Better Choice Company,” “we,” “our,” or “us”. These statements represent projections, beliefs, and expectations based on current circumstances and conditions and in light of recent events and trends, and you should not construe these statements either as assurances of performance or as promises of a given course of action. Instead, various known and unknown factors are likely to cause our actual performance and management’s actions to vary, and the results of these variances may be both material and adverse. Accordingly, readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. We undertake no obligation to publicly release the results of any revision to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Overview and Outlook
Better Choice is a rapidly growing pet health and wellness company committed to leading the industry shift toward pet products and services that help dogs and cats live healthier, happier and longer lives. Our mission is to become the most innovative premium pet food company in the world, and we are motivated by our commitment to making products with integrity and treating pets and their parents with respect. We believe that our broad portfolio of pet health and wellness products are well positioned to benefit from the trends of growing pet humanization and an increased consumer focus on health and wellness, and have adopted a laser focused, channel-specific approach to growth that is driven by new product innovation. Our executive team has a proven history of success in both pet and consumer-packaged goods, and has over 50 years of combined experience in the pet industry and over 100 years of combined experience in the consumer-packaged goods industry.
We sell our premium and super-premium products (which we believe generally includes products with a retail price greater than $0.20 per ounce) under the Halo brand umbrella, which includes Halo Holistic™, Halo Elevate® and the former TruDog brand, which has been rebranded and successfully integrated under the Halo brand umbrella during the third quarter of 2022. Our core products sold under the Halo brand are made with high-quality, thoughtfully sourced ingredients for natural, science based nutrition. Each innovative recipe is formulated with leading veterinary and nutrition experts to deliver optimal health. Our diverse and established customer base has enabled us to penetrate multiple channels of trade, which we believe enables us to deliver on core consumer needs and serve pet parents wherever they shop. We group these channels of trade into four distinct categories: E-commerce, which includes the sale of product to online retailers such as Amazon and Chewy; Brick & Mortar, which primarily includes the sale of product to Pet Specialty retailers such as Petco, Pet Supplies Plus and neighborhood pet stores, as well as to select grocery chains; DTC, which includes the sale of product through our website halopets.com; and International, which includes the sale of product to foreign distribution partners and to select international retailers.
The Global Pet Food and Treat Market
The U.S. represents the largest and most developed market for pet food globally, with food and treats accounting for approximately $39 billion of consumer sales in 2019, or 36% of the total U.S. pet care market, according to AlphaWise and Morgan Stanley Research. According to the American Pet Product Association, between 66% and 70% of all households in the U.S. own a pet, equating to a total pet population of more than 130 million companion animals and an average of 1.7 pets per household. Pet spending represents a significant portion of household spend on consumer products, as this translates to an average annual spend on pet care of more than $1,500 per pet owning household, with $460 of this spend attributed to pet food and treats.
Historically, consumer spending on pets grew at an approximately 3% CAGR in the decade leading up to the COVID-19 pandemic, driven by steady annual increases in household pet ownership of approximately 1%, the continued premiumization of the category and the humanization of pets. These industry tailwinds have been magnified in the post-COVID landscape, as stay-at-home orders have driven a more than tripling of annual pet ownership growth alongside fundamental changes in consumer purchasing behavior. This surge in pet acquisition has led to a dramatic increase in the forecasted growth of the pet care industry over the next ten years.
Beyond the estimated $3.9 billion permanent increase to annual spend on pet food and treats, this “Pet Boom” was driven by the acceleration of pet ownership by millennial and Gen-Z households. From a demographic perspective, younger pet owners are more likely to spend a higher percentage of their income on pets, treat their pet as an important member of the family and to purchase products from pet specialty and online retailers rather than from grocery stores. Along these lines, women are 3.2 times more interested in purchasing pet food than men, and are 2.4 times more likely to engage with search ads than men. Taken holistically, these traits suggest a preference to purchase more premium and super-premium pet food and treats from brands like Halo, with a tendency to purchase products in the channels where we compete.
Globally, Asia is the second largest market for pet products, with China representing the largest market opportunity for growth. Like the U.S., growth in the Asian pet care industry has been driven by dramatic increases in household pet ownership. We believe that growth in Asia is fueled by increasing levels of economic financial status and demand for premium, western manufactured products as a result of product quality concerns. This demand has been supported by a rapidly growing middle class in China, where a recent McKinsey report estimated that in 2018 roughly 730 million people in urban areas fell into the income categories of “aspirants” and “affluents,” with the Brookings group estimating that approximately 60 million people are added to these income categories each year. We believe that this growth drove the increase in the number of dog-owning Chinese households as measured by Euromontior, which increased from 12% in 2015 to 20% in 2020, according to Euromonitor. According to Euromonitor, the Chinese market for premium dry dog and cat food is anticipated to grow at a 20% CAGR and 28% CAGR, respectively, from 2015 through 2025, suggesting that the Chinese pet market has significant room for growth in the foreseeable future. We are focused on targeting Chinese pet owners with the highest willingness to pay, which tend to be urban dwelling millennial and Gen-Z women. In 2021, 80% of our products were purchased online, and approximately 50% of our end-consumers were born after 1990.
Our Growth Strategy
•Strong Innovation Pipeline. We have a robust and growing pipeline of new products, and believe our size is an advantage as we are nimble enough to quickly bring new products to market, but large enough to benefit from strong existing customer relationships and established economies of scale with our co-manufacturers.
•Ability to Leverage Differentiated Omni-Channel Strategy for Growth. We believe that we can leverage our differentiated omni-channel strategy to design and sell products purpose-built for success in specific channels while maintaining our ability to leverage marketing and sales resources cross-channel. We believe that this strategy will allow us to deliver on core consumer needs, maximize gross margin and respond to changing channel dynamics that have accelerated because of the COVID-19 pandemic.
•Capitalize on Continuing Trends of Humanization of Pets. We believe our combination of innovative products designed specifically for certain channels can assist our growth to become a leader in the premium and super-premium categories across dog and cat food.
•Well Positioned to Capitalize on a Once-in-a-Generation Demographic Shift in Asia. We believe that Asia represents the largest macro-growth opportunity in the global pet food industry. In China, the number of households that own a pet has doubled in the last five years, with younger pet owners leading growth.
Results of Operations for the three and six months ended June 30, 2022 and 2021
The following table sets forth our consolidated results for the periods presented (in thousands):
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| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | Change | | % | | 2022 | | 2021 | | Change | | % |
Net sales | $ | 16,515 | | | $ | 10,989 | | | $ | 5,526 | | | 50 | % | | $ | 33,529 | | | $ | 21,819 | | | $ | 11,710 | | | 54 | % |
Cost of goods sold | 11,788 | | | 7,088 | | | 4,700 | | | 66 | % | | 24,095 | | | 13,644 | | | 10,451 | | | 77 | % |
Gross profit | 4,727 | | | 3,901 | | | 826 | | | 21 | % | | 9,434 | | | 8,175 | | | 1,259 | | | 15 | % |
Operating expenses: | | | | | | | | | | | | | | | |
Selling, general and administrative | 8,187 | | | 6,766 | | | 1,421 | | | 21 | % | | 15,764 | | | 13,653 | | | 2,111 | | | 15 | % |
Share-based compensation | 801 | | | 332 | | | 469 | | | 141 | % | | 1,892 | | | 2,857 | | | (965) | | | (34) | % |
Total operating expenses | 8,988 | | | 7,098 | | | 1,890 | | | 27 | % | | 17,656 | | | 16,510 | | | 1,146 | | | 7 | % |
Loss from operations | (4,261) | | | (3,197) | | | (1,064) | | | (33) | % | | (8,222) | | | (8,335) | | | 113 | | | 1 | % |
Other (expense) income: | | | | | | | | | | | | | | | |
Interest expense, net | (106) | | | (2,234) | | | 2,128 | | | (95) | % | | (182) | | | (3,069) | | | 2,887 | | | (94) | % |
Gain on extinguishment of debt, net | — | | | 851 | | | (851) | | | (100) | % | | — | | | 457 | | | (457) | | | (100) | % |
Change in fair value of warrant liabilities | — | | | 29,356 | | | (29,356) | | | (100) | % | | — | | | 22,873 | | | (22,873) | | | (100) | % |
Total other (expense) income, net | (106) | | | 27,973 | | | (28,079) | | | (100) | % | | (182) | | | 20,261 | | | (20,443) | | | (101) | % |
Net (loss) income before income taxes | (4,367) | | | 24,776 | | | (29,143) | | | 118 | % | | (8,404) | | | 11,926 | | | (20,330) | | | 170 | % |
Income tax expense | — | | | — | | | — | | | — | % | | 3 | | | — | | | 3 | | | 100 | % |
| | | | | | | | | | | | | | | |
Net (loss) income available to common stockholders | $ | (4,367) | | | $ | 24,776 | | | $ | (29,143) | | | 118 | % | | $ | (8,407) | | | $ | 11,926 | | | $ | (20,333) | | | 170 | % |
Net sales
We sell our products through online retailers, pet specialty retailers, our online portal directly to our consumers and internationally to foreign distribution partners (transacted in U.S. dollars). Generally, our sales transactions are single performance obligations that are recorded at the time the product is shipped from our distribution centers and when control transfers. We offer a variety of trade promotions, discounts and incentives to our customers, which impacts the transaction price of our products and our net sales accordingly. DTC net sales include revenue derived from shipping fees and are net of loyalty points earned (a portion of revenue is deferred at the time of the sale as points are earned and not recognized until the redemption of the points, estimated based on historical experience). We record a revenue reserve based on historical return rates to account for customer returns.
Information about our revenue channels is as follows (in thousands):
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| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
E-commerce (1) | | $ | 3,681 | | | 22 | % | | $ | 2,892 | | | 26 | % | | $ | 7,505 | | | 22 | % | | $ | 6,902 | | | 32 | % |
Brick & Mortar (2) | | 3,956 | | | 24 | % | | 1,698 | | | 16 | % | | 8,290 | | | 25 | % | | 3,592 | | | 16 | % |
DTC | | 1,762 | | | 11 | % | | 2,341 | | | 21 | % | | 3,695 | | | 11 | % | | 4,777 | | | 22 | % |
International (3) | | 7,116 | | | 43 | % | | 4,058 | | | 37 | % | | 14,039 | | | 42 | % | | 6,548 | | | 30 | % |
Net Sales | | $ | 16,515 | | | 100 | % | | $ | 10,989 | | | 100 | % | | $ | 33,529 | | | 100 | % | | $ | 21,819 | | | 100 | % |
(1)The Company's E-commerce channel includes two customers that amounted to greater than 10% of the Company's total net sales during the three and six months ended June 30, 2022. These customers had an aggregate of $3.6 million and $7.3 million of net sales during the three and six months ended June 30, 2022, respectively. Two customers amounted to greater than 10% of the Company's total net sales during the three and six months ended June 30, 2021, respectively. These customers had an aggregate of $2.6 million and $6.4 million of net sales during the three and six months ended June 30, 2021, respectively.
(2)The Company's Brick & Mortar channel includes $2.2 million and $4.0 million of net sales from one customer that amounted to greater than 10% of the Company's total net sales during the three and six months ended June 30, 2022, respectively. None of the Company's Brick & Mortar customers represented greater than 10% of net sales during the three and six months ended June 30, 2021.
(3)One of the Company's International customers in China amounted to greater than 10% of the Company's total net sales during the three and six months ended June 30, 2022 and represented $5.5 million and $11.3 million of net sales, respectively. One of the Company's International customers in China represented greater than 10% of net sales during the three and six months ended June 30, 2021 and represented $2.7 million and $3.8 million of net sales, respectively.
Net sales increased $5.5 million, or 50%, to $16.5 million for the three months ended June 30, 2022 compared to $11.0 million for the three months ended June 30, 2021. Net sales increased $11.7 million, or 54%, to $33.5 million for the six months ended June 30, 2022 compared to $21.8 million for the six months ended June 30, 2021. The increases were driven by growth in our Brick & Mortar channel driven by the launch of Halo Elevate®, growth in our International channel and growth in our E-commerce channel, partially offset by lower DTC sales driven by an intentional reduction in new customer acquisition advertising in preparation for our strategic rebranding of TruDog under the Halo umbrella which was successfully executed and implemented in July 2022. Our revenue growth and the sales for certain products has been negatively impacted by the supply chain issues being felt globally as we navigate through short-term shortages in raw materials as well as production delays stemming from labor constraints.
Key factors that we expect to affect our future sales growth include new product innovation and launches, our expansion strategy in each of the sales channels and our key supplier relationships.
Gross profit
Cost of goods sold consists primarily of the cost of product obtained from co-manufacturers, packaging materials, freight costs for shipping inventory to the warehouse, as well as third-party warehouse and order fulfillment costs. We review inventory on hand periodically to identify damages, slow moving inventory, and/or aged inventory. Based on this analysis, we record inventories at the lower of cost or net realizable value, with any reduction in value expensed as cost of goods sold.
Our products are manufactured to our specifications by our co-manufacturers using raw materials. We work with our co-manufacturers to secure a supply of raw materials that meet our specifications. In addition to procuring raw materials that meet our formulation requirements, our co-manufacturers manufacture, test and package our products. We design our packaging for our co-manufacturers and the packaging is shipped directly to them.
Our gross profit has been and will continue to be affected by a variety of factors, primarily product sales mix, volumes sold, discounts offered to newly acquired and recurring customers, the cost of our manufactured products, and the cost of freight from the manufacturer to the warehouse.
During the three months ended June 30, 2022, gross profit increased $0.8 million, or 21%, to $4.7 million compared to $3.9 million during the three months ended June 30, 2021. Gross profit margin decreased 6% to 29% for the three months ended June 30, 2022 compared to 35% for the three months ended June 30, 2021. During the six months ended June 30, 2022, gross profit increased $1.2 million, or 15%, to $9.4 million compared to $8.2 million during the three months ended June 30, 2021. Gross profit margin decreased 9% to 28% for the six months ended June 30, 2022 compared to 37% for the six months ended June 30, 2021. The change in margin was driven primarily by cost increases from our primary suppliers as a result of broad-scale inflation in the industry.
We are actively working with our co-manufacturer and freight partners as well as transitioning some of our primary suppliers to generate future cost savings. Additionally, we have taken price increases to our customers to help cover these cost increases beginning late in the third quarter of 2021 and additional price increases in the first quarter of 2022, which became effective in the second quarter of 2022. We could see continued margin variability due to the current economic environment and pricing pressures due to inflationary costs for both transportation and raw materials. We will continue to refine and optimize our overall pricing strategy as we evaluate the future impact of inflation and align ourselves with the market.
Operating expenses
Our SG&A expenses consist of the following:
•Sales and marketing costs for specific customer promotional programs, paid media, content creation expenses and our DTC selling platform. Marketing costs are geared towards customer acquisition and retention and building brand awareness. During the three months ended June 30, 2022, sales and marketing costs increased approximately $1.1 million or 44%, to $3.6 million from $2.5 million during the three months ended June 30, 2021. During the six months ended June 30, 2022, sales and marketing costs increased approximately $2.0 million or 45%, to $6.5 million from $4.5 million during the six months ended June 30, 2021. The increases were driven primarily by increased promotional spend in our International sales channel, as well as marketing and advertising agency fees related to building and launching our new sales strategy, partially offset by an intentional decrease in DTC marketing spend as we begin to shift the focus of our investments to our longer-term DTC strategy.
•Employee compensation and benefits increased approximately $0.6 million or 38% during the three months ended June 30, 2022 to $2.2 million from $1.6 million during the three months ended June 30, 2021. During the six months ended June 30, 2022, employee compensation and benefits increased approximately $0.1 million or 2% to $4.2 million from $4.1 million during the six months ended June 30, 2021. The increases were primarily related to the addition of several key members to our management team during the second half of 2021 that have significant operating experience in the pet and consumer-packaged good sectors which we believe will enable us to successfully execute our growth strategy, partially offset by higher severance costs during the first half of 2021.
•Freight, which is primarily related to the shipping of DTC orders to customers, remained flat at $0.5 million for both the three months ended June 30, 2022 and 2021. Freight also remained flat at $0.9 million for both the six months ended June 30, 2022 and 2021. Freight costs are generally increasing, offset by our lower DTC sales as described above.
•Non-cash charges including depreciation, amortization, disposal or sale of assets and bad debt expense decreased $0.2 million or 33% during the three months ended June 30, 2022 to $0.4 million from $0.6 million for the three months ended June 30, 2021. During the six months ended June 30, 2022, non-cash charges decreased approximately $0.2 million or 18% to $0.9 million from $1.1 million during the six months ended June 30, 2021. The decreases were driven by disposals of certain assets during 2021.
•Other general and administrative costs for various general corporate expenses, including professional services, information technology, insurance, travel, costs related to merchant credit card fees, product development costs, rent, and warehousing costs. During the three months ended June 30, 2022, other general and administrative costs decreased $0.1 million, or 6% to $1.5 million compared to $1.6 million for the three months ended June 30, 2021. The decrease was driven by lower professional fees and lower franchise taxes, partially offset by a non-cash reduction of our sales tax liability of $0.1 million during the three months ended June 30, 2021 with no similar expense during the three months ended June 30, 2022, as well as increased international consulting fees during the three months ended June 30, 2022. During the six months ended June 30, 2022, other general and administrative costs increased $0.2 million, or 6% to $3.3 million compared to $3.1 million for the six months ended June 30, 2021. The increase was driven by a non-cash reduction of our sales tax liability of $0.6 million during the six months ended June 30, 2021 with no similar reduction of expense during the six months ended June 30, 2022, as well as increased International consulting fees during the six months ended June 30, 2022, partially offset by lower professional fees, lower franchise taxes and a reduction in rent expense as a result of prior lease terminations.
Share-based compensation includes expenses related to equity awards issued to employees and non-employee directors. During the three months ended June 30, 2022, share-based compensation increased $0.5 million, or 141%, to $0.8 million as compared to $0.3 million for the three months ended June 30, 2021. The increase was primarily driven by accelerated vesting of a certain stock option grant during the three months ended June 30, 2022, additional stock option grants, and a non-recurring reduction to expense during the three months ended June 30, 2021. During the six months ended June 30, 2022, share-based compensation decreased $1.0 million, or 34%, to $1.9 million as compared to $2.9 million for the six months ended June 30, 2021. The decrease was driven by accelerated vesting on certain stock option grants during 2021, partially offset by common stock issued for board service and accelerated vesting of a certain stock option grant during 2022 and additional option grants.
Interest expense, net
During the three months ended June 30, 2022, interest expense decreased $2.1 million to $0.1 million from $2.2 million for the three months ended June 30, 2021. During the six months ended June 30, 2022, interest expense decreased $2.9 million to $0.2 million from $3.1 million for the six months ended June 30, 2021. Interest expense for the three and six months ended June 30, 2022 is comprised of interest on our Wintrust Credit Facility and the amortization of debt issuance costs. Interest expense for the three and six months ended June 30, 2021 is comprised of interest on our Wintrust Credit Facility, payable in-kind interest on our previous senior subordinated convertible notes, and the amortization of debt issuance costs and accretion of debt discounts, including $1.4 million during the three months ended June 30, 2021 associated with the remaining discount on the previous convertible notes, which was fully accreted to interest expense in connection with the conversion to common stock resulting from the commencement of the trading of our common stock on the NYSE.
Gain on extinguishment of debt, net
During the three months ended June 30, 2021, we incurred a gain on extinguishment of debt of $0.9 million, while there was no corresponding activity for the three months ended June 30, 2022. Gain on extinguishment of debt for the three months ended June 30, 2021 relates to extinguishment accounting applied in connection with the forgiveness of our Paycheck Protection Program ("PPP") loans. During the six months ended June 30, 2021, we incurred a net gain on extinguishment of debt of $0.5 million, while there was no corresponding activity for the six months ended June 30, 2022. Gain on extinguishment of debt for the six months ended June 30, 2021 relates to extinguishment accounting applied in connection with the forgiveness of our PPP loans, partially offset by the loss on termination of a term loan and ABL Facility.
Change in fair value of warrant liabilities
Common stock warrants classified as liabilities are revalued at each balance sheet date subsequent to the initial issuance and changes in the fair value are reflected in the Condensed Consolidated Statements of Operations as change in fair value of warrant liabilities. The change in fair value for the three and six months ended June 30, 2021 relates to the change in the fair value of common stock warrants issued in connection with a private placement. Upon consummation of our IPO on July 1, 2021, these warrants met the requirements to be considered equity were reclassified as such.
Income taxes
Our income tax provision consists of an estimate of federal and state income taxes based on enacted federal and state tax rates, as adjusted for any allowable credits, deductions and uncertain tax positions as they arise. During the three and six months ended June 30, 2022, we recorded minimal income tax expense. During the three and six months ended June 30, 2021, we did not record income tax expense due to the continued losses incurred by us. The effective tax rate is less than 1% for the three and six months ended June 30, 2022 and 0% for the three and six months ended June 30, 2021, which differs from the U.S. Federal statutory rate of 21% primarily because our losses have been fully offset by a valuation allowance due to uncertainty of realizing the tax benefit of our NOLs.
Liquidity and capital resources
Historically, we have financed our operations primarily through the sales of shares of our common stock, warrants, preferred stock, and loans. In connection with our IPO on July 1, 2021, we issued and sold 8,000,000 shares of common stock at a price of $5.00 per share and received total net proceeds of approximately $36.1 million, after deducting underwriting discounts and commissions of $2.8 million, and offering costs of approximately $1.1 million. On June 30, 2022 and December 31, 2021, we had cash and cash equivalents and restricted cash of $17.8 million and $28.9 million, respectively.
We are subject to risks common in the pet wellness consumer market including, but not limited to, dependence on key personnel, competitive forces, successful marketing and sale of our products, the successful protection of our proprietary technologies, ability to grow into new markets, and compliance with government regulations. As of June 30, 2022, we have not experienced a significant adverse impact to our business, financial condition or cash flows resulting from the COVID-19 pandemic, geopolitical actions or threat of cyber-attacks. However, we have seen adverse impacts to our gross profit margin due to inflationary pressures in the current economic environment. Uncertainties regarding the continued economic impact of inflationary pressures, the COVID-19 pandemic, geopolitical actions and threat of cyber-attacks are likely to result in sustained market turmoil, which could negatively impact our business, financial condition, and cash flows in the future.
We are required to maintain a minimum liquidity (as defined in the Wintrust Credit Facility) of no less than (i) $13.0 million as of the last day of each fiscal quarter ending March 31, 2022, through and including the last day of the fiscal quarter ending December 31, 2022 and (ii) $12.0 million as of the last day of the fiscal quarter ending March 31, 2023, and as of the last day of each fiscal quarter thereafter, to comply with our financial covenants. We have historically incurred losses and expect to continue to generate operating losses and consume cash resources in the near term. These conditions raise substantial doubt about our ability to continue as a going concern for a period of twelve months from the date these interim condensed consolidated financial statements are issued, meaning that we may be unable to generate sufficient operating cash flows to
maintain compliance with our financial covenant giving the lender the right to call the debt. We have implemented and continue to implement plans to achieve operating profitability, including various margin improvement initiatives, the consolidation of and introduction of new co-manufacturers, the optimization of our pricing strategy and ingredient profiles, and new product innovation.
Our ability to raise additional capital may be adversely impacted by the potential worsening of global economic conditions, including inflationary pressures, and the recent disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting from the COVID-19 pandemic and geopolitical tensions. If we seek additional financing to fund our business activities in the future and there remains doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding on commercially reasonable terms or at all. If we are unable to raise the necessary funds when needed or achieve planned cost savings, or other strategic objectives are not achieved, we may not be able to continue our operations, or we could be required to modify our operations that could slow future growth. The accompanying interim condensed consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates the realization of assets and payments of liabilities in the ordinary course of business. Accordingly, the interim condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount of and classification of liabilities that may result should we be unable to continue as a going concern.